Auctioning Keywords in Online Search

Keyword advertising, or “sponsored links” that appear alongside online search results or other online content, has grown into a multibillion-dollar market. Providers of keyword advertising, such as Google and Yahoo, profit by auctioning keywords to advertisers. An issue of increasing importance for advertising providers is the “share structure” problem—that is, of the total available resources for each keyword (in terms of exposure), how large a share should be set aside for the highest bidder, for the second-highest bidder, and so on. The authors study this problem under a general specification and characterize the optimal share structures that maximize advertising providers’ revenues. They also derive results on how the optimal share structure should change with advertisers’ price elasticity of demand for exposure, their valuation distribution, total resources, and minimum bids. The authors draw implications for keyword auctions and other applications.